I don't know much about milk cows, but I do know about cash cows, and it seems to me that there is at least this similarity: They both require a lot of work to nurture and milk.
Cash cows are businesses that produce a lot of cash. They resemble a money tree, but I can't use that metaphor because my mother always told me that money doesn't grow on trees.
Thankfully, she never had much to say about cows.
Businesses from which you can consistently squeeze a 25 percent profit are cash cows that are welcome in my barnyard. I would like to have a herd of them, but they aren't easy to raise. Here is my take on growing cash cows.
First, there must be a strong demand for your product. It must solve a pervasive, painful problem, but that is only part of the equation. You also need a low-price source for materials or labor so there is enough room for you to add value, sell the product and make a profit.
The market must also be large, or there must be a hook that keeps great numbers of customers coming back to you. When I was selling and delivering medical oxygen, we had our customers hooked for life. Perhaps that should have been my slogan: "Guaranteed for life."
To raise a cash cow you have to know where you and the company are going. You need a flight plan, and then you must follow it. And you need to know your mission. An elderly friend of mine tells me that when he was on guard duty during World War II, he was instructed to challenge anyone who approached. Whoever it was, they had 30 seconds to state their mission or they would be shot. If that were true of startup businesses today, the mortality rate would be even higher than it already is.
Like a dairy farmer who needs to know how much feed is going in and how much milk is coming out, the owner of a cash cow needs to know his income and outflow. Knowing the dollars isn't as important as knowing the percentages.
Sometimes you can change a real dog into a cash cow if you carefully review every expense item on your income statement and sweat blood over each half-percentage point that isn't warranted. This practice, combined with aggressive expense reduction, can make a substantial difference on the profit line. And while profit isn't as vital as cash flow, without either one the cow is still dead.
Owners need to empower the people who keep the cash cow alive. Keep in mind that I don't believe empowerment comes from simply giving people a piece of paper with which they can do anything they want. To me, empowerment means they can help define the playing field and create the systems in which they will operate. Without the proper tools, your employees can be walking around in . . . well, you know, some pretty deep stuff.
Owners also need to maximize what each person contributes. I like to divide annual cash flow by the number of employees. To have a cash cow, that dollar amount per employee needs to be constantly getting larger.
Once you create a cash cow, don't go off and neglect this money machine. When they dry up, it takes a tremendous amount of effort to get them running again. But if you keep your cash cow going, you can enjoy that sweet, delicious, creamy taste of success.
Stephen W. Gibson is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu